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Wednesday, January 13, 2010

Explaining Enron

In his latest collection of New Yorker articles, "What the Dog Saw", Malcolm Gladwell includes two separate pieces on Enron.

In "Open Secrets" (originally published in the New Yorker, Jan 2007) he discusses a collective failure to appreciate the flaws in Enron's business model - a failure suffered by many investors and journalists, as well as (apparently) Enron management and other employees. As Gladwell tells the story, this was not due to a lack of available information, or because critical nuggets were concealed from public scrutiny (as in a classic conspiracy), but because of a failure to "connect the dots". For a longer commentary on this article, see my post Puzzles and Mysteries.

In "The Talent Myth", (originally published in the New Yorker, July 2002) he discusses the Enron Superstar culture, in which individual "talent" was valued much higher than actual outcomes. He documents examples of high-flying managers who, having burned large quantities of capital on glamorous but incompetent ventures, were simply given fresh opportunities to burn more capital. Gladwell points the finger of blame at consultants McKinsey for encouraging this narcissistic culture, and expresses his surprise that McKinsey has so far avoided the kind of public mauling that Enron's other advisors (auditors and investment bankers) have suffered.

What joins up these two pieces is the subject of my next book: organizational intelligence. As it happens, Gladwell talks about organizational intelligence in a further piece on "Connecting the Dots" (originally published in the New Yorker, March 2003). And in the piece on talent, Gladwell points out some of the characteristics of the Superstar culture that may impair both organizational intelligence and organizational success.

Moving people around frequently, so their true performance cannot easily assessed. Hence "performance evaluations that aren’t based on performance".

The needs of Enron customers and shareholders were secondary to the needs of its stars.

From a psychological point of view, narcissism is more about identity (who we are) than about viability (what we do). Narcissists (both individually and collectively) may not be very good at assessing what is really going on, are likely to be one-sided when "sharing" knowledge and ideas, and will generally try to interpret events as confirmation of how wonderful they are rather than as opportunities for learning. So that's several problems with organizational intelligence right there.

Here's how Gladwell sums it up.

"The broader failing of McKinsey and its acolytes at Enron is their assumption that an organization’s intelligence is simply a function of the intelligence of its employees. They believe in stars, because they don’t believe in systems. In a way, that’s understandable, because our lives are so obviously enriched by individual brilliance. Groups don’t write great novels, and a committee didn’t come up with the theory of relativity. But companies work by different rules. They don’t just create; they execute and compete and coördinate the efforts of many different people, and the organizations that are most successful at that task are the ones where the system is the star. ... The talent myth assumes that people make organizations smart. More often than not, it’s the other way around."

That's pretty much what I've been saying for years - that the intelligence of a system is not a simple arithmetic function of the intelligence of the subsystems. So to make an intelligent organization, it isn't enough to recruit the brightest people, locate them in state-of-the-art office buildings, and provide them with the smartest computer tools and networks. Super-intelligent individuals are often poor at talking to one another and sharing knowledge, let alone coordinating their work effectively.

And if we come back to the question of "connecting the dots", this is always going to be difficult in any large organization, but it's perhaps going to be particularly difficult in a culture where everyone is "thinking outside the box". (As Gladwell wryly ends his piece, "maybe it was the box that needed fixing".) Sometimes there is no substitute for careful and detailed analysis.

Gladwell interleaves the Enron story with a story of British and American intelligence trying to interpret German propaganda during the Second World War. One journalist at the time described the propaganda analysts as “the greatest collection of individualists, international rolling stones, and slightly batty geniuses ever gathered together in one organization.” Despite this fact, they achieved an extraordinarily high rate of accuracy, especially when they worked jointly and systematically and not as isolated mavericks.

In contrast with this state of heightened realism, a narcissistic organization is relentlessly positive. Barbara Ehrenreich is currently in the UK promoting her new book called (in this country) "Smile and die"; I heard her on Radio 3 Nightwaves last night saying that Condoleezza Rice occasionally wanted to raise some questions or doubts . . . but she was afraid to because the president hated "pessimists". This is what Ehrenreich calls "a bubble of forced optimism". (See also RSA lecture and Barbara Ehrenreich on the Negative Power of Positive Thinking.) I guess Enron was just an extreme example.

2 comments:

Great post, Richard - I hope it's read "in all the right places." Back when Enron was the darling of the business media for their "innovative" and "ground-breaking" business model I, was so disgusted with the lack of critical analysis that I cancelled my Business Week subscription. Similarly, I cancelled my Fortune subscription a few years earlier when I couldn't stomach any more gushing about dot.coms and their "innovative" and "ground-breaking" business models. I don't have any subscriptions left to cancel, but if I did, there would be lots of potential targets after the recent airline security imbroglio. Among folks (like us) who look at enterprises as systems (or end-to-end business processes) it's been a source of amazement how long it's taking for the governments to realize that having a bunch of disparate organisations doing their thing, even if they are "stars," will never be as effective as having them operate as part of a holistic system. Another factor that is strongly related, and is touched on in your post, is the corrosive effect of inappropriate motivation and metrics - reward the star, punish the system. In my practice I find that the most common cause of problems in large-scale processes is "perverse incentives" that reward the individual or the organization unit at the expense of the whole. I was happy to note that in the introduction to "SuperFreakonomics" the authors noted that the underlying theme of "Freakonomics" was simply "People respond to incentives." And so do organizations. Oh well, it keeps me in business.Alec Sharpasharp@clariteq.com

I don't have a problem with "innovative" and "ground-breaking", and I wouldn't really expect popular business magazines to offer critical analysis. The real problem is in Enron and its brilliant and highly paid managers and advisors.

I agree that these guys were given perverse incentives, but they were also systematically unable to understand the effects of their decisions even if they had wanted to.